Dodd-Frank’s not so happy anniversary

Tomorrow marks the fifth anniversary of Dodd-Frank. In honor of the occasion, Veronique de Rugy looks at some of the commentary documenting her contention that “the legislation has overwhelmed the regulatory system, stifled the financial industry, impaired economic growth, and done nothing to correct the pernicious effects of ‘too big to fail.’”

Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street hard. Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day.

Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card.

Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.

Has Dodd-Frank nevertheless made the financial system more secure? Many of the threats to financial stability identified in the latest report of Dodd-Frank’s Financial Stability Oversight Council are primarily the result of the law itself, along with other government policies.

And there’s a new report by John Berlau of the Competitive Enterprise Institute, which shows how Dodd-Frank has stifled competition among the banks. The “failure to approve new banks, for instance, means that those ‘too big to fail’ banks are now more entrenched than ever.”

Indeed, in the last five years regulators have approved only one new bank, as opposed to an average of 170 new banks per year before 2010. According to Berlau: “This lack of new bank competitors is one important reason why a large bank failure could severely curtail the supply of credit and availability of financial services. That in turn sets the stage for a continuing cycle of bailouts.”

Meanwhile the New York Times reports that “Fannie and Freddie are Back, Bigger and Badder Than Ever.” In their current incarnation as government controlled entities supported by a line of credit from the Treasury, we have what Jim Parrott, a senior adviser with the National Economic Council in the Obama administration calls “the worst of all worlds.” The system “attracts too little private capital, provides too little mortgage credit, and still poses too much risk to the taxpayer.”

With Dodd-Frank unable to remedy the problems it was designed to address, the door opens for leftists like Elizabeth Warren to push for more radical measures. The conservative message — that real competition is the answer to “too big to fail” — is unlikely to be heard, much less heeded.